Herd Instinct: ICICI Pru Focused Blue Chip vs. ICICI Pru Top 100

In this post, let us compare two large cap funds from the same fund house. One a consistent performer with a terrific track record and the other a young superstar. The results will hopefully show how herd instincts among investors (and perhaps amcs and therefore(?) intermediaries too?) can obscure good funds from the same fund house.

ICICI Pru Focused Blue Chip Equity

Category: Large Cap

Benchmark: CNX Nifty

Inception Date: 23rd May 2008

AUM: 5879.7 Crores (30th June 2014)

Investment Objective: To generate long-term capital appreciation and income distribution to unit holders from a portfolio that is invested in equity and equity related securities of about 20 companies belonging to the large cap domain and the balance in debt securities and money market instruments. The Fund Manager will always select stocks for investment from among top 200 stocks in terms of market capitalization on the National Stock Exchange of India Ltd.

If the total assets under management under this scheme goes above Rs. 1,000 crores the Fund Manager reserves the right to increase the number of companies to more than 20.

Indicative asset allocation:

Equity: 70% or more. Rest in debt or money market instruments

Portfolio:

Large cap: 88.5%

Mid-cap: 8.9%

Small-cap: 0.6%

Cash: 2%

Dominant Sectors:

Finance: 33.47%

Energy: 12.99%

IT: 13.79%

FMCG: 14.9%

ICICI Pru Top 100

Category: Large Cap

Benchmark: CNX Nifty

Inception Date: 9th July 1998

AUM: 666.56 Crores (30th June 2014)

Investment Objective: To generate long-term capital appreciation from a portfolio that is invested predominantly in equity and equity related securities

(broader the mandate, the less verbose the objective!)

Indicative asset allocation:

Equity: 95% or more. Rest in debt or money market instruments

Portfolio:

Large cap: 79%

Mid-cap: 12.3%

Small-cap: 3.3%

Cash: 5.4%

Dominant Sectors:

Finance: 27.6%

Energy: 25.6%

IT: 15%

Portfolio overlap: Out of the 80% folio listed at VR online, there is an overlap of 52%. Which is significant.

ICICI Top 100 has a current AUM of ~ 666 Crores. Lower than what focused blue chip had 5 years ago?

The reason I wrote up this analysis is to pose the question why is this so?

In terms of performance, that is bare returns, there is not much difference between the two funds. In fact, Top 100 has a longer track record of consistency.

So why has this been pushed to the background? Who is responsible for this?

The AMC? The distributors? The investors? My guess is everyone.

The only difference between the two funds:

Focused blue chip began operations at the start of the 2008 financial crisis. Therefore, I think it appeared as a saviour to many since the established funds (incl. top 100) were struggling to cope with the crash.

While existing mutual fund investors flocked to focused blue chip equity, new investors saw it as a safe bet. One person said, ‘the fund would never fail’.

It is heartening that MorningStar analysts have given a ‘silver’ rating to Top 100 and a ‘neutral’ rating to focused blue chip, while VR online rates them both as 5* funds.

Silver: Fund with advantages that outweigh the disadvantages across the five pillars and with sufficient level of analyst conviction to warrant a positive rating.

Neutral: Fund that isn’t likely to deliver standout returns but also isn’t likely to significantly underperform, according to the analysts.

Now a few definitions for your perusal. Hopefully, they would clarify the first word in the title of the post.

Herd Behaviour

A group of animals fleeing from a predator shows the nature of herd behavior. In 1971, in the oft cited article “Geometry For The Selfish Herd,” evolutionary biologistW. D. Hamilton asserted that each individual group member reduces the danger to itself by moving as close as possible to the center of the fleeing group. Thus the herd appears as a unit in moving together, but its function emerges from the uncoordinated behavior of self-serving individuals. (wikipedia)

Herd Instinct

A mentality characterized by a lack of individual decision-making or thoughtfulness, causing people to think and act in the same way as the majority of those around them. In finance, a herd instinct would relate to instances in which individuals gravitate to the same or similar investments, based almost solely on the fact that many others are investing in those stocks. The fear of regret of missing out on a good investment is often a driving force behind herd instinct. (investopedia)

Information cascade

This occurs when a person observes the actions of others and then—despite possible contradictions in his/her own private information signals—engages in the same acts. A cascade develops, then, when people “abandon their own information in favor of inferences based on earlier people’s actions” (wikipedia).

Moral of the story: Never buy a fund because it is popular or even if a professional recommends it. Focus on your own portfolio. Do your own research. Ignore star ratings.

Note: Do not sell or stop investing in focused blue chip because of this post. Evaluate your needs and make informed choices. You know where to find the necessary tools 😉

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Many years ago, my wife and I took an evening stroll around a temple tank. The moon was full and beautiful. We stopped to stare at it for a few minutes and took some pictures. Before we stopped to look at the moon, no one around us cared about it in the busy street. When they saw two people looking at something, they became curious and joined in. Soon there was a chain reaction! I am pretty sure behavioral scientists have a word for this phenomenon. Do share, if you know what it is.

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42 Comments

I am one of the herd who invested in ICICI Prudential Focused Bluechip Equity.I did however narrow down this fund based on your pdf to select mutual funds.There is certainly a case for investing in “Top 100” so that you can expect slightly better returns especially during a bull run.However the “downside protection” of Focused Bluechip Equity is among the best that I have seen.Thanks for the interesting comparision.

I am one of the herd who invested in ICICI Prudential Focused Bluechip Equity.I did however narrow down this fund based on your pdf to select mutual funds.There is certainly a case for investing in “Top 100” so that you can expect slightly better returns especially during a bull run.However the “downside protection” of Focused Bluechip Equity is among the best that I have seen.Thanks for the interesting comparision.

Higher the AUM, lower the expense ratio. So focused bluechip will have lower expense ratio in both regular and direct options. The direct option will be about 0.5% or so lower. Portfolios are not identical. So expense ratio comparison is not possible.

Higher the AUM, lower the expense ratio. So focused bluechip will have lower expense ratio in both regular and direct options. The direct option will be about 0.5% or so lower. Portfolios are not identical. So expense ratio comparison is not possible.

Dear Pattu, your website and analysis is simply fantastic. There is a lot to learn from each of your posts. I make it a point to check your website everyday just like reading a newspaper. (Anyways now I have subscribed to your blog).

I used to wonder why morning star rated FBC fund as neutral wher as Top100 as silver.These ratings were given in March 2013 and Dec 2013 respectively. I thought perhaps the ratings were quite old at least for FBC. What I have also observed is that even fundsindia has FBC fund in most of their ready to go portfolios.

In fact it is a coincidence that I too ran a similar comparison between these two funds with the help of your tools yesterday. I think this observation that you made, might be the explanation for the silver morning star rating for Top100 fund.

I think to sum it up FBC is better known across investors because it is marketed better and the silver lining of this fund in contrast to Top100 is its better downside protection.

BTW, I myself have this fund (FBC) in my portfolio for large cap section.

Also, you said that perhaps FBC has lower score because of its higher AUM, i.e. lower churn ratio but in the accompanying article you concluded that there is hardly any correlation between fund performance and AUM size. Can you please shed light on what you meant ?

Thank you very much. Apologies for the delayed response. Yes, in the article on size vs performance, I could not find any proof. However, it is clear that the fund manager is stuck with some stocks if the AUM is large. If these stocks are solid large caps then it is okay. If they are duds, it is trouble. With reg. focused blue chip, keep an eye on its performance.

Dear Pattu, your website and analysis is simply fantastic. There is a lot to learn from each of your posts. I make it a point to check your website everyday just like reading a newspaper. (Anyways now I have subscribed to your blog).

I used to wonder why morning star rated FBC fund as neutral wher as Top100 as silver.These ratings were given in March 2013 and Dec 2013 respectively. I thought perhaps the ratings were quite old at least for FBC. What I have also observed is that even fundsindia has FBC fund in most of their ready to go portfolios.

In fact it is a coincidence that I too ran a similar comparison between these two funds with the help of your tools yesterday. I think this observation that you made, might be the explanation for the silver morning star rating for Top100 fund.

I think to sum it up FBC is better known across investors because it is marketed better and the silver lining of this fund in contrast to Top100 is its better downside protection.

BTW, I myself have this fund (FBC) in my portfolio for large cap section.

Also, you said that perhaps FBC has lower score because of its higher AUM, i.e. lower churn ratio but in the accompanying article you concluded that there is hardly any correlation between fund performance and AUM size. Can you please shed light on what you meant ?

Thank you very much. Apologies for the delayed response. Yes, in the article on size vs performance, I could not find any proof. However, it is clear that the fund manager is stuck with some stocks if the AUM is large. If these stocks are solid large caps then it is okay. If they are duds, it is trouble. With reg. focused blue chip, keep an eye on its performance.

Higher the AUM, lower the expense ratio. So focused bluechip will have lower expense ratio in both regular and direct options. The direct option will be about 0.5% or so lower. Portfolios are not identical. So expense ratio comparison is not possible.

Higher the AUM, lower the expense ratio. So focused bluechip will have lower expense ratio in both regular and direct options. The direct option will be about 0.5% or so lower. Portfolios are not identical. So expense ratio comparison is not possible.

Thank you for all your postings and which helped me to understand better. I used your MF selection PDF and short listed couple of them (large cap equity). Then did some more analysis and found out almost all of the (top 3 or 4 funds) funds top 10/15 holdings are pretty much same. My question is: I am planning to create my own portfolio of these stocks (less than 20 stocks) and invest them on SIP basis over a year or so. Pros: No need to pay MF fees, More control Cons: Pay charges while buying and selling. Keep monitor for performance (on yearly basis). More stress. What are tax impact? I understand that long term mf proceeds are non taxable or less tax bracket. Is it same for stocks as well? Are there anything that I am missing in this approach? fyi I have not finalized on this approach yet, but just thinking about this. Please let me know. My goal : Invest in equity for 10 or more years.

You can see my latest post in this regard. SIP in large caps should work. Taxation is same as mfs. Less than one year old purchase at 15% and more than 1Y, tax-free. Volatility will be significant. So before investing ensure you do so only in solid companies. Understand their balance sheet well.

I find it awesome that you manage your time so well for research, blogging and above all promptly responding to everyone. Yes, as someone has pointed out above, there’s lots to learn and ponder over in each of your posts. I confess that I too am part of the herd 😀 And I have been running a SIP from quite sometime and I too found comfort about FBC from your ‘Choosing MF pdf’ 🙂 Thanks a lot!

It takes me almost one month to read your all post and understand this article.finally i understand this post thank you for this post still final verdict is not coming “size of fund increses that afect perfomance of fund and not much more flexiable”

Sir While comparing two funds with 10+ years track record of same catagory(Large Cap) with same benchmark suppose, 1. Fund-A have better Downside protection than Fund-B 2. Fund-B have better returns than Fund-A wrt benchmark in last 10 year 3. Fund B have higher Alpha & Standard Deviation than Fund A as per Morningstar site. Then which fund to select among the two?